Director Penalty Notices resume with major changes

During the COVID-19 pandemic, the Australian Tax Office (ATO) suspended the most overdue tax collection as part of the support initiatives put in place to help struggling businesses deal with the impact. Now that most of the COVID-19 measures have ended, the ATO has recommenced tax collection activity, including the issuing of Director Penalty Notices.

What has changed?

There are two significant changes to Non-lockdown Director Penalty Notices (DPNs) which all company directors (and future directors) need to be aware of:

The option for the company to enter a payment arrangement has been removed. This means that directors can no longer avoid personal liability for a penalty under a Non-lockdown DPN by entering into a payment arrangement for the outstanding liability within the 21 days.
It is now an option to appoint a Small Business Restructuring Practitioner (SBRP) within the 21 days. What is a SBRP you ask? We’ll cover that further on. But first, here’s a DPN refresher…

Director Penalty Notices explained

As a company director, you are under an obligation to ensure the company can meet its financial obligations. For some years now, the ATO has had the power to make directors personally liable for key tax obligations by issuing Director Penalty Notices.

If a director fails to meet a PAYG withholding, GST or SGC liability in full by the due date, they can become personally liable for director penalties equal to the amount owed.

Before the ATO can recover penalties from you personally, they must first issue a DPN stating the unpaid amounts and remission options available. Failing to comply will lead to further recovery activity which may include issuing garnishee notices, offsetting personal tax credits or initiating legal proceedings. The options available to a director when they receive a DPN depends on the type of DPN. The two types of DPNs are briefly summarised below:

1. Non-lockdown DPN

Issued to a director of a company where:

The company has lodged a business activity statement (BAS) or instalment activity statement (IAS) within three months of the due date; and
SGC statements have been lodged within one month and 28 days after the end of the quarter the contribution relates to; but
The relevant amounts have not been paid.

Under a non-lockdown DPN, directors have the option to avoid personal liability if within 21 days the company:

pays the debt
appoints an administrator
appoints a Small Business Restructuring Practitioner (SBRP)
places the company into liquidation

2. Lockdown DPN

Issued to a director of a company that has failed to lodge a BAS, IAS or SGC statement within the timeframes above and has not paid the relevant amounts due. The only option for directors to avoid personal liability in this situation is for the company to pay the debt within 21 days of the DPN being issued.

What is a SBRP?

Small Business Restructuring (and the SBRP) was introduced in new legislation on 1 January 2021. It is a new form of insolvency appointment aimed to simplify the voluntary administration process for eligible small businesses. The process allows financially distressed small businesses to access a single, streamlined process to restructure their debts whist allowing the owners to remain in control of their business.

To be eligible to access this new process your company must:

be incorporated under the Corporations Act;
have total liabilities which do not exceed $1 million on the day the company enters the process. This excludes employee entitlements;
resolve that it is insolvent or likely to become insolvent at some future time and that a small business restructuring practitioner should be appointed; and
appoint a small business restructuring practitioner to oversee the restructuring process, including working with you to develop your debt restructuring plan and restructuring proposal statement. A list of restructuring practitioners that can undertake this work is available on ASIC’s website.

Director Penalty Notices can be issued on estimates

If a company fails to report PAYG withholding, GST or SGC obligations by the due date, the ATO may make a reasonable estimate of the unpaid and overdue amount of the liability.

The director penalty provisions apply to these estimated liabilities. The estimate is due and payable by the company on the day the ATO gives the company the estimate notice.

If the ATO has estimated the companies PAYG withholding, net GST or SGC liabilities it is treated as an unreported amount.

Our advice for current directors

It is important that directors pay close attention to their company’s reporting and payment obligations to ensure they don’t get caught out. In the case of large companies, where directors may not have direct involvement in the company’s tax compliance obligations, it is crucial they:

make themselves aware of the financial position of the company
take action to ensure that all relevant tax related liabilities are reported and paid on time
emphasise the potential consequences of non-compliance to key personnel of the business
ensure ASIC always has your current postal address so that a DPN reaches you in time

Note that a tax obligation begins on the day the relevant tax period ends, not on the due date of the assessment. Directors that cease to be directors after the date the tax period ends, but before the due date of the assessment, are still subject to the obligation.

Our advice for new directors

Recently appointed directors can be held personally liable for historical SGC, PAYG and GST liabilities if they remain unpaid and unreported within 3 months or more after the date of the appointment. If you are about to become a company director, you should check for any unpaid or unreported ATO liabilities before your appointment.

Further help:

If you have a tax debt that you are unable to pay in full, you should obtain immediate advice to understand the options available to you.

If cash flow is a growing concern in your business, it may be time to speak to a business improvement specialist to help get your finances back on track. You can contact our cash flow experts on 07 3023 4800 or at mail@marshpartners.com.au

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